Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice on a wide range of topics, including the best strategies to use in international stock markets. Each Investor Toolkit update gives you a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Today’s tip: “There are 3 convenient ways to invest in foreign growth without getting out of your comfort zone.”

We think most investors should hold some foreign investments in their portfolios for maximum diversification. Moreover, many fast-growing markets, like China and India, have positive long-term outlooks. Their populations are generally younger than those in North America, and rising incomes are helping more of them advance into the middle class.

Still, investing on international stock markets remains riskier than investing in North America. Many stock markets in emerging countries have language barriers, uncertain investor-protection laws, and a less pronounced commitment to openness, fairness and other qualities we tend to take for granted in established markets.

But you can avoid these potential pitfalls when you follow these 3 ways to profit from foreign markets:

1. International exchange-traded funds (ETFs): Exchange-traded funds offer investors more benefits than ever before, mainly because of increased competition. That can make ETFs good choices for certain parts of your portfolio — such as the portion you devote to international investing.
   
   Exchange-traded funds mirror the performance of a stock-market index or sub-index. They hold a more-or-less fixed selection of securities that are chosen to represent the holdings that go into the calculation of the index or sub-index.
   
   Exchange-traded funds trade on stock exchanges, just like stocks. Investors can buy them on margin or sell them short. The best exchange-traded funds offer well-diversified, tax-efficient portfolios with exceptionally low management fees. They are also very liquid.
   
   A good example of an international exchange-traded fund is iShares MSCI Germany Fund (New York Exchange symbol EWG), which we analyzed in the latest issue of Canadian Wealth Advisor. This ETF tracks the stocks in the MSCI Germany Index. This index aims to replicate 85% of the total market capitalization of the German stock market. The remaining 15% is unavailable for investment, partly due to limitations on foreign ownership. The fund’s top holdings are Siemens AG (engineering conglomerate), 9.2%; BASF (chemicals), 8.9%; SAP (software), 6.9%; Bayer (diversified chemicals), 6.4%; Daimler AG (automobiles), 6.4%; Allianz (insurance), 6.2%; Deutsche Bank AG, 4.9%; E.ON (energy), 4.6%; Deutsche Telekom, 3.7%; and BMW AG (automobiles), 3.5%.
   
   As big and well-known as these German companies are, investing in them through the Frankfurt exchange can be difficult for many Canadian investors. The ETF is a simple and uncomplicated way to tap into Europe’s strongest economy.

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2. Blue-chip U.S. companies: A simple way to gain international exposure at lower risk is to invest in U.S. stocks with international operations. Many of the best blue-chip stocks in the U.S. have large customer bases in fast-growing foreign countries. This lets them benefit from a recovering global economy, as well as a return to prosperity in the U.S.
   
   With the Canadian dollar now above parity with the U.S. dollar, there’s never been a better time to add high-quality, multinational U.S. stocks to your portfolio.
3. New York American Depositary Receipts (ADRs): An American Depositary Receipt is an investment unit for foreign companies that trade on a U.S. stock market. These units can represent fractions of shares, whole shares, or multiple shares in the foreign company. ADRs can help you simplify your international investing by letting you buy foreign shares on U.S. exchanges without the complications of buying or selling on a foreign exchange, in a foreign currency.
   
   You’ll need to be highly selective with these investments. Yet they can help you cut risk, because American Depositary Receipts have to follow some U.S. Securities and Exchange Commission and New York Stock Exchange rules. Two examples of recommendations of ours that trade as ADRs are Honda Motor Co. (symbol HMC on New York), and Switzerland-based Diageo (symbol DEO on New York), the British-based giant in alcoholic beverages.

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